Formation and destruction of coalition groups under economic growth

FUNDAÇÃO

GETULIO VARGAS

EPGE

Escola de Pós-Graduação

em Economia

SEMINÁRIOS

DE PESQUISA

ECONÔMICA

"Formation and Destruction

Or

Coalition Groups under

Economic Growth"

Prof. Arilton Teixeira

(IBMEC)

LOCAL

Fundação Getulio Vargas

Praia de Botafogo, 190 - 10° andar - Auditório Eugênio Gudin

DATA

09/11/2000 (53 feira)

HOR1-\RIO

Formation and Destruction of Coalition

Groups under Economic Growth

Ronald A. Edwards*

and

Arilton Teixeira

t

Comments are Welcome

N ovember 7, 2000

Abstract

This paper introduces a model economy in which formation of coalition groups under technological progress is generated endoge-nously. The coalition formation depends crucially on the rate of ar-rival of new technologies. In the model, an agent working in the saroe technology for more than one period acquires skills, part of which is specific to this technology. These skills increase the agent produc-tivity. In this case, if he has worked more than one period with the same technology he has incentives to construct a coalition to block the adoption of new technologies. Therefore, in every sector the workers have incentives to construct a coalition and to block the adoption of new technologies. They will block every time that a technology stay in use for more than one period.

*Institute of Economics Academia Sinica, Taipei, Taiwan, Off: 886-2-2782-2791 x530, Fax: 886-2-2785-3946, Email: redwards@ieas.econ.sinica.edu.tw

1 Introduction

The economic performance varies largely across countries and in the same country across time1

. Following Solow [10] and Solow [11], our assumption is

that the engine of growth is the technological progresso Given the diversity of economic performance across countries our question is why the technological progress differs so much across countries or within a country over time.

In a world with closed countries, the success of a country in developing new technologies could explain its better economic performance. But, in a world where firms can use technologies developed in other countries, this explanation does not apply. The question to focus on is why countries resist to technological progress and how this resistance occurS.

The assumption ofthis paper is that "(technological) progress and growth, ... , involves costs that usually fell disproportionately on some groups,,2. In this case, those groups would resist to adopt new technologies. Moreover, "resistance almost always takes place through non-market mechanisms"3, principally through government intervention. These costs are not related with the production of the new technique (in fact, we are assuming an ex-ogenous and cost-less technological progress). The costs come from the lost of skills or human capital, specific to the old technology, suffered by the workers of the sectors where the technological progress is happening (in the next section we willlook in some estimative of this loss).

This paper follows the line of Parente and Prescott [7], Parente and Prescott [8], Krussel and Rfos-Rull

[3],

Holmes and Schimitz

[2]

and Teix-eira

[12],

where the technological progress depends on the resistance of some groups to adopt new technologies. These papers stress the benefits of groups to resist to new technologies. In Parente and Prescott [8] some groups wanted to block technological progress fearing that technological progress in their sec-tors would reduce the relative price of this good. In this case, if the demand were price inelastic the technological progress would reduce the employment in their sectors. Holmes and Schimitz

[2]

and Teixeira

[13]

study how the in-ternational trade affect the decision to adopt new technologies. Particularly, Teixeira

[13]

studies the effects of the adoption of technology in the invest-ment in physical capital. He shows that in closed economies (economies with

lSee Parente and Prescott [6], Prescott [9] and Chari, McGrattan and Kehoe [1]. 2Mokyr [10, page 328]. See also Olson [5] for evidendences of resistence to adopt new technologies.

Table 1: Predicted Growth Rate of Wages - By Years of Job Tenure

Years of Tenure Rate of Growth

quota) the adoption of new technologies will be stopped for some periods, reducing investment and the capital labor ratio.

This paper is divided in ... .

2 Wages and Accumulation of Skills

The basic point that we want to stress in this section is that the workers acquire skills or human capital in each passing year that they work in the same firmo Besides, part of these skills are specific to this technology. In this case, "workers with longer prior job tenures suffer substantially greater losses from displacement,,4. In other words, with each passing year working with the same technology a worker acquires skills. Part of these skills are general and part are specific to this technology. The worker would loose the skills that are specific once he starts a new job. What Toppel

[15]

estimative indicates is that this loss is substantial.

Clearly, not every job lost by a worker can be used to support the above hypothesis. For example, a new match between a labor and a firm can have a problem of private information. The labor knows his skills, but the firm does not know. In this case, the labor can have less skills than he originally sad. The firm, after realizing that, can fire the labor.

To eliminate this and other problems, Toppel

[15]

use a sample of men that have been displaced from a job because of layoffs or plant closing. He found that the wage 10ss varies from 9.5% for a worker with 5 years of seniority ar tenure to 43.9% for workers with more than 20 years of tenuré.

The results of Toppel [15] are summarized in the Tables 1-36

. Table 1

4Toppel [15, page 148].

5See Toppel [15, page 149]. The sample consists of 4,367 men.

Table 2: Wage lndex

Years of Tenure Wage lndex

Table 3: Wage Loss By Years of Job Tenure

Years of Tenure 5 10 15 20 Method 1 0.19 0.28 0.33 0.40 Method 2 0.26 0.35 0.38 0.42

shows the sample growth rate of the wage generated by accumulation of skills (general and specific). Table 2 is generated from Table 1, by constructing a wage indexo Thus, in period zero the wage is 1. Then, we increase this wage following the growth rate given in Table 1. We see that the growth rate is higher in the beginning and it reduces over time.

Table 3 shows the estimated wage loss of a worker by years of job tenure. The estimation is based in two different procedures, that we call Method 1 and Method 2. Method 1 is the lower bound of the wage 10ss7.

From Tables 1-3 we can summarized the following conclusions:

(i) Wages grow faster in the first periods of a new job than in the later periods. Thus, wages are concave in years of job tenure;

(ii) The wage loss by job displacement is quite substantial, varying between

19% for a period of 5 years tenure to 42% for a 20 years tenure.

3 The Model

There are M goods at each date and a competitive firm producing each of those goods with a constant return to scale technology. There is no borrowing or lending and no physical capital accumulation. There are measure À

>

O

skills that take place in the job.

of households that live forever. The period commodity space is L = lRM+l,

the space of M final goods and efficency units of labor. A point of L is

x = (Cl, ... , CM, h).

We now turn to define the consumption set of a household i. To do that we need to specify the amount of labor that a household can supply in each period. In the first period, each household is endowed with one unit of time. We wiU caU this unskilled labor. But, a household can accumulate skills. More specificaUy, after each period working in a firm (technology), the agent accumulates or acquires skills. We measure this new skiUs in units of time of the unskilled labor and we are assuming that the accumulation of skills foUow some concave and bounded assumptions. That is, the marginal increase of skills for each period of work in the same technology reduces over time. Moreover, there is a maximum amount of skills for each technology. But, every time that a firm starts to use a new technology, an old employee looses part of his skiUs accumulated in the previous technology.

For example, suppose that in the first period, an agent starts to work with some technology. He can seU the services of one unit of unskilled labor. In the second period, for example, he would have 1.10 units of unskilled labor. In the third, he would have 1.15 and so on. Now, if in the fourth period he changes sectors or the technology that he is working with then he can supply only 1.07 units of labor. Thus, there is no externaI effects for other workers. The increase in his productivity comes only from his accumulation of skills in a "learning by doing" way. From the firm point of view, everything happens as if the agent was selling one unit of time in his first period, 1.10 in the second and so on.

Define H the space of functions h : IN x IN x IN -t lR+ piecewise

mono-tone increase, piecewise concave, piecewise continuous and h'(aj, aj, nj)

2:

1, where aj is the current technology index for workers of sector j, aj is the next period technology index for workers of sector j, and nj is the number of periods that worker i has been working with technology index ajo

The consumption set of agent i is

(1)

All households admit a utility function of the form

(2)

where ＲＺｾＱ＠ O:j = 1,

p:::;

1 and f3 E (0,1) .

• Technologies

The technological set of a firm of sector j is

(3)

where 'Y

>

1 and aj is an integer that indexes the technology in sector j and is determined by past policy decisions of workers of sector j.

We are assuming that there is an exogenous technological progress in every sector. The advance in technologies happens in the following way. There is a draw technology given by !Í>(t). At each period t, !Í>(t) is a

M-vector that shows the sectors that will have a new technology available in the next período That is, !Í>j(t) = 1 if sector j will have a new technology in period t

+

1 and !Í>j(t) = O if noto Finally, the most advanced technology for sector j in period t, Aj(t), and the technology used in sector j im period t, aj(t), are defined as

t

Aj(t) =

L

!Í>j(j)

j=l

For simplicity we will supress time symbols from Aj(t) and aj(t) leaving them implicit from now on.

The technology advance step by step. Besides, as we will see below, there is no uncertainty with respect to next period since the announcement of a new technology is made in the current period and known before the relevant decisions.

to obtain the block of the new technology. This blocking technology is G :

IN x IN --t 1R+ that transforms technology index A in technology index a at a cost dO /'í" where /'í, is a positive constant, d = A - a

(4)

where ()

2:

O and a :::; A.

• Policy Arrangement

The integers aj indexes the technological set

Yj

that produces good j. This integer belongs to the set {O, ... , Aj}, and Aj :::; t.

In the beginning of period

t,

the workers of a sector <P j

(t)

= 1 decide the

technology that they will use next período That is, workers of sector j such that <Pj(t) = 1 choose aj E {aj, ... , Aj, Aj

+

I}.

• Blocking

We will say that workers of sector j are blocking the adoption of new tech-nologies if aj

<

Aj.

• Timing

In the beginning of period t, the value of <p(t) is known. Workers of each sector j such that <P j

(t)

= 1 get together and decide if they will construct

a coalition to block or not the new technology. That is, after <p(t) is an-nounced the workers of each sector that will have a new technology available get together. If they choose to block they divided the amount G(·) among themselves and use the blocking technology to create a barrier. The best technology will not be used in the subsequent período After these decisions, the amount of labor that each agent can supply is known and markets are opened.

• Accumulation of Skills: an example

To make clear how an agent accumulates skills, let us wríte one example. Suppose that agent i works in a sector j. Define a function ｨｾ＠ : IN --t 1R+ by

h' _iaj,aj,nj ( " ) ₌ 2 _-e -n'. _J

where

h;

is the amount of labor services that agent i can supply next period and nj is the number of periods that agent i has been working with technology

Now, from Equation (5) we can see that, fixing

aj

and making nj -+ 00

the marginal rate of accumulation of skills goes to

o.

That is,

h;

-+ 2.

3.1 Definition of Equilibrium

This is a discrete time infinite dynamic game with 2 stages in each period.

In stage one, the draw technology <I>(t) chooses randomly which sectors will have a new technology available in the next period. This becomes a public knowledge. Given <I>(t), the workers of each sector j such that <I>j(t) = 1 get together and decide if they will construct a coalition and stop the adoption of the new technology available. In the second stage, price and allocations are determined competitively.

We will work with the Markov equilibrium8 . But, we wiU restrict our analysis to the set of Markov equilibrium which is symmetric with respect to the workers of the same sector.

In each period we will analyze the game using backward induction from stage 2 to stage 1. In the second stage, the economy state variables are (s, H, SI) where s =

(t,

AI, ... , AM' aI, ... , aM, nI, ... , nM),

t

indicates the cur-rent period, Aj is the index of the most advanced technology available for sector j in period

t,

aj is the index of the technology in use in sector j in

period

t

and nj is the number of periods that technology indexed by aj has

been in use in sector j. H = ｌｾｉ＠ hi is the aggregate stock of human capital

in period t. For simplicity, we will write s = (t, A, a, n). We are abusing notation, using nj to represent the number of periods that a worker in sector

j has been working with technology aj as well as the number of periods that

firms of sector j have been using technology aj. For the set of symmetric

Markov equilibrium that we are working here they are the same. In the second stage, consumers and firms solve their problem. That is, prices and allocations are determined competitively. The maximization problem of a consumers and firms are static.

In the first stage <I>(t) is anounced and workers choose the technology that 8See Maskin and Tirole [4].

they will use next period. Once <I>(t) is known the economy state variables are (s, H) and A'. Let S = JN3M+l be the space of state variables and F the

space of functions gj : S -t IN. Let Dj : FM-l -t F be the best response

correspondence (for workers of sector j). That is, if gj E Dj(g_j) then

where <I> =

ar! ...

｡ｾｍ＠

Finally, let D(g) be a M vector of best response correspondence of all sectors .

• Dynamic Equilibrium

The equilibrium that we are working with is a Markov equilibrium9 _with

respect to the state variables (s,

H).

We are restricting our attention to the Markov equilibrium which is symmetric with respect to workers of the same sector. An equilibrium is the following set of elements:

(i) price functions p(s, H) = {Pl, ... ,Pm, W = I};

(ii) households allocations

{Xi(S, H)}

for all i; (iii) firms allocations {Xj(s,

H)}

for all j;

(iv) laws of motion a' = g(s, H), H' = G(s, H, s');

1) Given p(s, H), and

aj

= gj(s, H), {Xdt=l solve the consumers' problem

and {Xj} solves the firms' problem;

3) Markets clear;

4)

9(S)

is a fixed point of D(g), That is, 9 E D(g).

3.2 Dynamic Equilibrium

In this section we will show that there exist conditions under which workers of any sector will block the adoption of new technologies, as long as (i) the technological index in use is not far from the technological frontier; (ii) the workers have been working with the same technology for some periods; and

(iii) the arrival of new technologies is not frequently. The intuition is as follows. On the one hand, the further a sector is from the frontier more the workers of this sector have to pay to block the new technology that arrives. Since their income is bounded and the cost to block is unbounded then, there is a distance d* from the frontier after which they will not block anymore. This happens because in this case their income is smaller than the cost to block. On the other hand, if the distance from the technological frontier is less than d* it would be better for workers to pay the cost of blocking, as long as, the probability to be hitted every period with a new technology is very small. In this case, the workers avoid loose part of their income for many periods compesaning the cost of blocking.

In the next proposition, (7 = ｾ＠ is the probability that a sector will have

a new technology available next period, Àj is the number of workers in sector j. We should stress that in equilibrium Àj is constant. The reason is the following. If a worker changes sector he looses part of his skills, reducing his income. In this case, he would change sector only when his sector changed technology. But, in this case he will be indifferent. Therefore, in the model there will have no movement of workers across sectors and Àj will be constant.

Now, we will introduce the assumptions that we will use to prove the propositions below.

AI: h(·,·,

t

+

1) - h(·, .,

t)

>

(1 - (7)t (7.

The intuition behind AI is as follows. Suppose that we are in period T. The probability that until period t

+

n our sector will not be hitted by a new technology reduces. Therefore, the increment in our income has to compensate this reduction in the probability, making our expected income nondecreasing over time.

Proposition 1 lf AI holds then there exist a n*

>

O, d*

>

1 and E*

>

O

such that for (3 E (1 - E*, 1), (7 E (O, E*) and p E (1 - E*, 1)

(i) lf n

> n* and d

<

d* then a coalition will be constructed and aj = ajo (ii) lf d

>

d* then no coalition will be constructed and Aj = aj

Proof. From the utility function of a worker i from a sector j we can

calculate the demand function of each good j.

｡ﾷｨｾ＠

where

h

_i

=

_hi(-) ifthere is no block or it is equal to

h

_i

=

hi(o) - G;d) ifthere

J

is block in sector j;

Gl

d) is the cost per worker of blocking since G (d) is the J

total cost and Àj is the number of workers in sector j o

(7)

h ;F. - 01 °M

W ere '±' - a 1 o o o o o aMo

Workers of sector j wiII choose n and d to maximize the last equationo Since we are looking for sufficient conditions, we wiII take the foIIowing stepso Suppose two strategies that are identical and without block in every period but period To Suppose that in a period T a new technology for period T

+

1 is announcedo In strategy 1 there wiII be a block of the new technology and in the strategy 2 there wiII be no block. This wiII be the only difference between these two strategieso We wiII show that the above conditions are sufficient to garantee that the block of the new technology wiII increase the utility (pay off) of this strategyo We generalize and show that the block wiII occur for some fix number of technologies and then the newest technoloy wiII be usedo That is, if d

:s

d* new technologies wiII be blocked and for d

>

d*

no block will occur o

Again, suppose that in period T a new technology for period T

+

1 is announcedo If the workers decide to block this new technology, in the next period the amount of labor services that a worker of sector j can supply will increase to hi(o, o,

n+

1) but each worker will pay an amount

Gl

d

) in period To

J

In period T

+

1 another technology can be announcedo If another technology is not announced then the amount of labor services that a worker of sector j

can supply wiII increase to hi(o, o, n

+

2) and so ono Here we wiII show just a sufficient condition to have a block of technologyo

Call

Ui

and

U

2 the pay offs of the strategies 1 and 2 respectiveIIyo We wiII

show that under the above hypothesis

Ui

-

U

2

>

00 Besides, we wiII show

that for some d and n the block wiII occur o BasicaIIy, :J d* ｾ＠ 1 such that for d:S d*, :J n*

>

1 such that for n ｾ＠ n* and d

:s

d* they will blocko

(8)

where the terms Ai come from Equation (7) once we isolate the expressions between brackets; (J = ;; is the probability to have available a new

technol-ogy in the next period and (1 - (J )t-I is the probability in period T that no

new technology will be available until period T

+

t, for t

2::

2.

As we can see from Equation (8), as (J -t 1 then UI - U₂ reduces. That

is, the incentive to block a new technology reduces as the probability to be hitted by a new technology increases.

Proof of (ii): From the first term of Equation (8) and since h(·,·,·) is bounded and CC) is not bounded there is a d* such that 'Vd

>

d* there will be no blocking.

Proof of

(i):

Now, let us show that under the above assumptions for

'Vd

<

d* and n

>

n* there there will be a block.

Looking at the second and third expresions of Equation (8) we see that if

aj -+ O then for any value of "( these two expressions are positive. Therefore, :la; such that for aj

>

a; the second and third expressions of Equation (8) are positive for any value of "(.

We have Ao ::; A I ::; At ::; At+ I, 'Vt

2::

2 since technological index does not

reduce. Taking limit in Equation (8) making p -t 1 and aj -t O we get

(3T Ao { -C(I)

+

ｾ＠

(3t [(h(-,·, n

+

t)) - h(·,·, t - 1)] (1 - (J)t-I} (9)

We are looking for some properties for the difference [(h(·,·, n

+

t)) - h(·,·, t - 1)] (1 - (J)t-I. That is, we will show that if this difference is greater than or equal to (3t

[(1 -

(J) t - (1 - (J t+t+

I]

then for

/'í,

< n

+

1 Equation (9) is positive. Define

Substitute Equation (10) into Equation (9) and use assumption 1 to get

U -

u

>

e

T _{A {-C(l)}

+

_{(3[1 - (1 - a)n+l]}}

I 2_. o l-(3(l-a) (11)

Again, take limit in Equation (11), making (3 -+ 1 and a -+ O we get

T { [l-(l-a)n+I]} T

UI - U2 ｾ＠ (3 Ao -C(l) + (3 1- (3(1-a) -+ (3 Ao {-/"é

+ n +

I}

Therefore, there exists E*

>

O such that for (3 E (1 - E*, 1), a E (O, E*)

and for a given /"é, then there exist a n* such that for all n

>

n* we have

UI - U₂

>

o.

This concludes the proof. _

Given Proposition 1, the next step is to prove the following result:

Proposition 2 lf all the assumptions of Proposition 1 hold then there exists

a dynamic equilibrium such that for every sector j such that nj

>

n* and dj

<

d* workers will block the adoption of new technologies. Otherwise there the workers will allow the adoption of the new technologies available

Looking at Equation (7) we see that the strategy of blocking is dominat. That is, the workers of one sector, will be better off if they block the adoption of new technologies, independent of what the workers of the other sectors are doing (once the condtions stabilished in Proposition 3 are satisfied).

This result has a resemblance with the Prisioner's Dilemma. Tha is, looking at Equation (7), we can see that workers of one sector are better off if the workers of the other sectors do not block the adoption of new technologies. But, if the workers of all other sectors are not blocking than it is better for workers of onw sector to blokc. In this case, we can aIs o conjecture that there exists an other equilibrium. Vou do not block if workers of the other sectors do not block. If anybody deviates, them you return to your behaviour given by Proposition 2. In the line of the the Folk Theorem, an equilibrium would it be that nobody blokcs.

with the same technology to make the workers choose to block. On the other hand, if CJ increases the expected income of blocking decreases, reducing the

incentive to block.

Proposition 3 lf all the assumptions of Proposition 1 hold then for every

sector j,

(i) n; = n(K, CJ) is a decreasing function of K and CJ;

(ii) d;

=

d(K) is a decreasing function of K.

Proof. To proof this proposition we will make use of expression (8). As

before, to make things easier I will drop the subscript j from n and d. If

all the assumptions of Proposition 1 hold then we know that in equilibrium

UI - U2 is a positive constant. Call it D that is, D = UI - U2

>

O

D = iJT Ao [( ,OjOj (h(.,

ＮｾｮＩ＠

-

ｾＩ＠

r _

b

OjOj

ｨｾＬＮ＠

n))P

1

+

iJT+l

,4,

[b

OjOj h(· ';'

n

+

1)

)P

_

(,Oj(Oj+

1);(-, "

O)

)P]

+

00

｛ＨＬＮ｜Ｏｾｪ｡ｪ＠

h( . . n

+

t))P

(,Oj(a j+l) h(· .

t

-

l))P]

L

,eT+tA_t I , , - ' , (1 _ CJ)t-l

t=2 P P

(i) The argument used here goes in the same line of the Implicit Function Theorem. Suppose that CJ increases. Looking at last part of expression (8)

we see that D decreases. Therefore, to compensate this reduction n has to increase. That is, since the arriving of new technology is independent and identically distribuited, if CJ the workers will require a longer period of

experience to with a technology to block the adoption of new technology. That is,

n;

is increasing in CJ.

Now, let us analyze the effect of variations in K, over n*. If K increases,

then the cost of blocking increases. that is, the function G(-) move up. From the first part of the above expression, we see that n has to increase to compensate the cost of blocking.That is,

n;

is increasing in K.

(ii) the effect of a variation on K over d* it is similar to the effect of K

over n* as we can see in the first brackets of the above expression. _

adoption. If the technological progress speed up, then the workers loose their incentive to construct coalitions and to block the adoption of the new technologies available. On the other hand, the slower is the technological progress the slower is the adoption of the new technology available. In the first case, I would say that the economy is a virtuous cycle. In the second case, I would say that the economy is in a vicious cycle.

An empirical implication of our model is that we should see less resistance to adopt new technologies among sectors where the technological progress is fast. On the other hand, the resistance to adopt new technologies should be higher among sectors where the technological progress is slow or we should see an increment in the resistance to adopt new technologies as the technological progress slow down 10.

4

Conclusions

In this paper we study the relation between the speed of technological progress or the rate of arrival of new technologies and the leveI of resistance to adopt them. Our main conclusion is that resistance (and adoption of new technolo-gies) and the speed of technological progress are inversely related. That is, the faster is the technological progress the smaller is the resistance to adopt new technologies. The reason is that workers acquire skills specific to a tech-nology. The longer a worker has been working with a technology, the higher is the capital specific skills acquired. In this case, the worker has incentive to resist to adopt the new technology, keeping his skilllevel his productivity and his income.

A slow technological progress would generate this environment. Without the arrival of a new technology the worker would keep working for a long period with old one. In this case, once a newer technology arrive the worker would resist to adopt this new technology.

On the other hand, sector where the technology advances fast, we should see less resistance, more adoption and higher growth rates.

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